Analytical pricing formulas for discretely sampled generalized variance swaps under stochastic time change

Zhigang Tong and Allen Liu ()
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Zhigang Tong: Department of Mathematics and Statistics, University of Ottawa, 585 King Edward, Ottawa, Ontario, K1N 6N5, Canada
Allen Liu: Model Validation, Enterprise Risk and Portfolio Management, Bank of Montreal, 27th Floor, First Canadian Place, Toronto, Ontario, M5X 1A3, Canada

International Journal of Financial Engineering (IJFE), 2017, vol. 04, issue 02n03, 1-24

Abstract: We propose a new class of models for pricing generalized variance swaps. We assume that, in the most general form, the process for the asset price is a function of a general time-homogeneous diffusion process belonging to a symmetric pricing semigroup, time changed by a composition of a Lévy subordinator and an absolutely continuous process. We derive the analytical pricing formulas for various types of generalized variance swaps based on eigenfunction expansion method. We also numerically implement the model and test its sensitivity to some of the key parameters of the model.

Keywords: Stochastic time change; eigenfunction expansion; generalized variance swap; Lévy subordinator; absolutely continuous time change process (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S2424786317500281

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